‘Hot money’, or short-term investment cash from international speculators, is flowing into some Southeast Asian countries and pumping up the value of their currencies, with a negative impact on exports. Malaysia, however, is in a better position to ward off danger thanks to reserves of up to US$106 billion, its largest in years.

Bank Negara Malaysia also has some safety mechanisms and the overall economy is in a much stronger position nowadays. Experts note, however, that they do not see active threat from investors at present and there is no need for the bank to take any action.

Domestic demand is slowing and inflation is low, preventing currency value increases naturally. The government could impose inflow and outflow controls, as well as entry and exit taxes, should markets become unstable. Bank Negara’s ‘overnight policy rate’ (OPR) was set at 2.75% in 2010 and has also prevented the ringgit’s value climbing too high.

While foreign investment is usually welcomed, ‘hot money’ presents a danger when short-term investors suddenly inject large amounts of capital, causing volatility that may easily go the other way when the investments are dumped.

Memory of the damage Malaysia suffered in the late 90s Asian Financial Crisis is still fresh. Speculators at first pushed currency values to record highs before abandoning positions and letting values crash. Malaysia’s ringgit went from a high of US$2.42 in 1997 to $5.20 in 1998, prompting the imposition of a $3.08 US dollar peg that lasted until 2005. Its value has appreciated gradually since then, reflecting Malaysia’s economic growth.

source & article: Bernama